Tag Archive | "bankruptcy"

Federal bankruptcy laws trump California state law requiring municipalities to pay public pension obligations, ruled a federal judge. California public pension giant CalPERS tried to block the bankruptcy as it means they are no longer first in line for repayment. San Bernardino stopped paying CalPERS when it filed bankruptcy. This is a major big deal and paves the way for other municipalities to do the same.

CalPERS has accused the city of filing for bankruptcy as a delay tactic, failing to provide reliable financial information and having no clear picture for how it will repay its creditors.

In reply, Paul Glassman, the city’s bankruptcy attorney, read aloud a note from City Attorney Jim Penman that called bankruptcy “an extremely painful process” for the city.

“It is an emergency room, not a health spa,” Glassman said, reading the note. “To suggest that any city would subject itself to the process unless it had to is simply disingenuous.”

On Tuesday, Stockton California said talks with creditors had failed and prepared to file Chapter 9 bankruptcy. They will be the largest American city ever to do so and the results will be closely watched by other struggling municipalities, public employees, Wall Street, hedge funds, and bondholders alike. If Stockton is able to structure their debt and pension obligations, then other cities will be emboldened to do the same.

Imagine if you will, that you are a retired public employee of Stockton, like John Skaff who requires knee replacement surgery and is being told his retirement medical benefits will be so deeply slashed that he may not be able to afford the surgery. Some say pension benefits were bloated, but there’s a human side of the story here too

Stockton is preparing to default. Santa Ana is outsourcing its fire department. They are not alone. Other California cities, like Bakersfield, are similarly in peril. Much of the problem is due to debt taken on during the real estate bubble and overwhelming public pension liabilities.

Vallejo is the poster child for what’s ailing California cities. It filed for bankruptcy in 2008, a victim of the real estate crash, losing a major employer in the process, and facing pension costs it cannot possibly meet.

Its police department was cut by one-third, and no longer has the resources to focus on low-level crimes like prostitution. Nor does the city have any regulations about medical marijuana dispensary. The result, rather obviously, is a huge increase in prostitution and marijuana sales.

“You know the only businesses in town making money? Pot and prostitution — that’s it,” says the operator of a dispensary who says his business is one of the few bringing foot traffic downtown.

Of course, legal marijuana and fewer cops tend to attract prostitutes, drug dealers, and their customers. This is becoming a major problem in the downtown area. Property values have plunged. Residents increasingly feel unsafe.

Neighborhood watch groups are trying to fill the gap as are other organizations. As city governments increasingly hollow out, they will be replaced by resilient communities, citizens banding together to do things. And indeed, in heartening news, it appears the people of Vallejo are doing just that. In the midst of a crisis, they’re saying, ‘We’re not leaving, Vallejo is worth saving.’

John Robb blogs about resilient communities extensively at Global Guerrillas, should you want to know more. At some point, we can no longer rely on the government and have to do things ourselves. That’s the primary point, and this may become less and less theoretical as cities fail to provide expected services. The alternative to such efforts is abandoned no-man’s-land-like parts of Detroit that effectively have no city services or protection.

Things aren’t as dire in other California cities (yet.) But even in Orange County, the home of fiscal conservatism, municipalities are getting devastated by vastly less revenue and the increasing awareness that they can no longer afford the public pension liabilities they’ve taken on.

The Orange County Register details the depth of the problems. In 2009-2010, twenty-three Orange County cities outspent their general fund revenues. This means they have to go into reserves, maybe borrow, and cut services. Many cities have already slashed budgets, but the worst may be yet to come.

The biggest problem for all of them is the cost of public safety, primarily escalating pension and health care liabilities, much of which are unfunded. That means they have no idea where the money will come from. Orange County cities and county agencies have an aggregate total of $8.75 billion in such unfunded liabilities. CalPERS handles most of the pensions and bills the cities for it, some of whom are borrowing to pay for it. Obviously, this is not sustainable or financially sound, even if the interest rates are lower than what CalPERS charges. Further, while cities can choose to pay off all their unfunded liabilities, few do. This means they fall a little further behind each year.

Interestingly, the cities in Orange County that are fiscally sound are those like Laguna Niguel, which outsources practically everything and has little pension debt and six times that debt in reserve. While outsourcing is certainly controversial, it does allow a city to be run on a tight, lean basis, with pension liabilities off-loaded onto someone else.

Like it or not, outsourcing could be a future model for California cities.

Central Falls, a densely populated and impoverished city of nearly 20,000 in Rhode Island, filed for Chapter 9 bankruptcy on August 1, citing unaffordable pension and retiree health care liabilities. The city said it had no choice after retirees refused to accept any cuts. A retired state Supreme Court judge now oversees their finances, and the city is asking him to impose “a prudent plan” which would lower what pensioners are paid.

The California city of Vallejo is just now emerging out of bankruptcy, which it filed in 2008. Part of its plan includes lowering what it pays to banks for interest and reducing benefits to retirees. Clearly, there are two powerful forces that do not want municipalities to file for bankruptcy: bondholders and public worker unions. The usual rules no longer apply when a city files. For example, Central Falls has now voided all public worker contracts and said retirees must immediately pay 20% of their medical coverage. Vallejo is now allowed to pay less interest on the bonds iy sold. In the parlance of finance, this is known as taking a haircut, and bondholders hate haircuts as much as public workers hate it when told their pensions are in jeopardy.

Sure, Vallejo’s finances cratered when the housing market did and Central Falls has been an “economic basket case” for years. But they are not isolated instances. Cities across the country, including many in California (as well as the state itself), have public pension and health care obligations they are struggling to meet. The problem nationwide is getting worse and more obvious. Years of neglect and hiding public pension problems are increasingly and painfully obvious.

At this point it doesn’t really matter how it happened or who was responsible. Public pension reform is coming and it will prove painful for many. Is it fair? No. If you paid into your pension fund for decades, retired, then learned the benefits will be slashed, well, it could be catastrophic. Sure, there are a few who get big cushy pensions and are the targets of rage. But many pensioners are just getting by. A cut in their benefits might mean they’ll need to start checking the price of cat food or take their meds every other day instead of once a day.

Ordinarily, cities in such a predicament could call on the state or federal government to help them out financially. But given the current recession, budget reductions, and stock market correction, no one has much in the way of extra money. They can’t borrow either, because no one will lend to them, except perhaps at steep rates. That’s no solution at all.

The State of California has massive unfunded public pension liabilities. Even worse, from a financial standpoint, the public pension by law can force the state to make up any funding shortfall they may have. So while such liabilities are not actually carried on the balance sheet of California, it is still ultimately responsible for them. This kind of financial shifting of liabilities can certainly make a balance sheet seem far healthier than it actually is.

There will be more municipal bankruptcies triggered by pension liabilities. How will we handle them?

They say no publicity is bad publicity, but doubtless Vallejo doesn’t feel that way after being ranked by two national magazines as a deeply undesirable place to live.

Newsweek ranked Vallejo the #2 dying city due to its overall population decline between 2000 and 2009 and its decline in residents under 18. They also noted that Vallejo has one of the highest foreclosure rates in the nation. Forbes used 10 factors, including crime, unemployment, taxes, and commute times and ranked Vallejo the #9 most miserable city. Needless to say, boosters and supporters of Vallejo were not overjoyed at this news, but by any objective measure, the city remains in deep financial trouble.

Vallejo filed for bankruptcy in 2008 primarily as a result of the cratering real estate market and soaring public pension costs. Their revenues dropped precipitously and they simply could not meet obligations. What happened next ended up having major implications for municipalities facing financial ruin, as well as their creditors and most especially public unions. In the ensuing court battles, a U.S. district court ruled that Vallejo, and by implication other cities in bankruptcy, have the right to reject collective-bargaining agreements made with unions. This of course is an earthquake. It means the city can slash salaries, pensions, and benefits even if they have a pre-existing agreement with a union.

Vallejo has proposed a restructuring plan that needs to be approved by stakeholders and the courts. Chief among the obstacles is whether Vallejo can cut retiree benefits and pensions. This would directly affect CalPERS, the largest public pension in the country, who would almost certainly sue. But the public unions are just one of the two 800 pound gorillas here. The other one is the bondholders.

The more protected and senior of the bondholders may escape with a minor haircut, but unsecured bondholders may only get 5-20 cents on the dollar. If you thought the public unions threw a hissy fit at the thought of wages and pensions being cut, well, bondholders (hedge funds, investment banks, and mutual funds, mostly) can pitch a mighty tantrum too. They tend to do it behind closed doors, away from the media, but are at least as powerful as the unions.

So, a municipal bankruptcy like Vallejo’s isn’t just about union busting, as some liberals have charged, because the bondholders (generally considered to be conservative in nature) are getting slammed too. While some may want to use this as a pretext to break the unions (or the power of bondholders), the reality is Vallejo simply has run out of money. They’ve slashed services to the bone in a desperate attempt to stay solvent including cutting police and fire personnel by about 40%

During the Great Depression, Congress passed an act saying states and municipalities could file for bankruptcy. The law was challenged and part of it was overturned by the Supreme Court in 1936 in Ashton v. Cameron County Water Imp. Dist. Congress then rewrote the law so that municipalities could file bankruptcy. However, the Supreme Court specifically ruled that the federal government did not have the authority to “restrict the States in the control of their fiscal affairs” and that ruling still holds. In other words, it was a clear issue of states’ rights. Thus, there is no provision in federal law for states to file bankruptcy. Also, bankruptcy courts are federal, not state. Therefore, there is no way for states to declare bankruptcy.

This is obviously of more than academic interest as many states, including California, are facing severe budget deficits. Without bankruptcy, the only option, should obligations not be able to be met, is to default on bond payments as well as not meet other obligations.

Some Republican lawmakers want to change this. They want states to be able to file bankruptcy, and they also want to force states and municipalities to use stricter private pension fund accounting rules to determine their liabilities. Currently, public pensions are allowed to assume far more generous (and utterly unrealistic) rates of return than private pensions can. House members Devin Nunes, Darrell Issa of California, and Paul Ryan of Wisconsin have introduced a bill to mandate the more conservative rules. If the pensions refuse, they would not be allowed to issue tax-exempt bonds. This would directly impact all three of the major public pensions in California, including CalPERS.

Even liberals will have trouble arguing that public pensions should not have to follow the same accounting rules that private pensions do. However, they are also alarmed that such rules, along with states being able to go bankrupt, are actually a conspiracy to go after public unions and pension funds. Let me assuage their fears. It’s not a conspiracy at all but rather in plain view for all to see.

Here’s how it would work. California files bankruptcy. A federal judge oversees what comes next. Normally, bondholders go to the head of the line. A crucial part of a new bankruptcy law is that it must have a ‘cram-down” provision that forces bondholders to take pennies on the dollar and not allow them to protest and drag the process out for years (Without such a provision, such a new law would simply be a gift to investment banks and hedge funds, allowing them to grab most if not all of the money.) Here’s the crucial part. The trustee for the bankruptcy would also have the power to break or re-negotiate public pension agreements. This is where the coming brass knuckles fight in California will be, with public unions and their pensions fighting an attempt by conservatives to break their power, influence, and to re-do existing pension agreements.

Many liberal blogs and commentators are howling about this. If they want to prevent it, then they need to explain where the money for the state budget and its woefully underfunded public pensions will come from. This is not a made-up crisis. The money really isn’t there

In 2008, the California city of Vallejo took the unprecedented step of filing for bankruptcy. A combination of falling revenues caused by the collapse of the real estate bubble and rising public pension costs cratered their finances. Other California cities and counties are watching how Vallejo manages, and may well follow suit.

Indeed, former Los Angeles Mayor Richard Riordan recently said the City of Los Angeles will likely declare bankruptcy by 2014, with excessive pensions being the primary reason why, and that the current administration is ignoring the approaching fiscal tsunami. A primary problem, he says, is the utterly unrealistic assumption that Los Angeles public pension funds will return 8% a year. A steady return of 8% is difficult even in good times, and nearly impossible in rough economic periods like we are facing now. Such rose-colored glasses estimates were also made by state public pension funds like CalPERS, and resulted in equally disastrous results. Rather than making money, the pensions have been losing money. This means state and municipality pension funding now must make up a serious shortfall. Riordan concludes that for Los Angeles to survive it must slash pensions, raise the retirement age, make employees pay more, and eliminate Cadillac pension benefits.

Vallejo appears to have been the poster child for excessive pension benefits and public worker salaries. A report by the Cato Institute released last year said 74% of Vallejo’s budget went for police and firefighter salaries and pension benefits. Regular public employees can retire at age 55 with at 81% of their final year’s pay. Police and fire employees have it even better, retirement at 50 at 90% pay. This certainly seems real cushy as well as financially unsustainable to me.

Our skills and background uniquely qualify us to manage large investigations while charting political minefields when pursuing claims against third parties, such as directors, officers, investors, and large builders.

Services and expertise

Bankruptcy, Insolvency, and Receivership

Business Valuation Services

Commercial Claims and Litigation

Directors’ and Officers’ Liability Claims

Verification and Compliance

If you or anyone you know needs services like this, please be sure to contact them.